Mary Daly, Speech/Interview: Resolute and Mindful, The Path to Price Stability, Orange County Business Council
Speech
Sufficiently Restrictive
“As we work to bring policy to a sufficiently restrictive stance—the level required to bring inflation down and restore price stability—we will need to be mindful. Adjusting too little will leave inflation too high. Adjusting too much could lead to an unnecessarily painful downturn.”
“Historically, we’ve used progress on the federal funds rate and where it stands relative to its neutral value as a gauge for policy restrictiveness. But in today’s world, that is only part of the picture. The funds rate does not capture the impact of the other tools in our tool kit, including the reduced asset holdings associated with balance sheet roll-off and the forward guidance we’ve provided about the future path of policy. It also misses the fact that central banks across the globe are tightening policy as well, likely amplifying the effects of our own rate hikes.”
“A more comprehensive way to gauge the actual level of tightening is to look at financial market conditions. Several researchers have done this and found that the level of financial tightening in the economy is much higher than what the funds rate tells us. As the figure shows, this has been true for a while now. In fact today, while the funds rate is between 3.75 and 4 percent, financial markets are acting like it is around 6 percent.”
“We also have to account for the fact that, while financial markets react quickly to policy changes, the real economy takes longer to adjust. Overlooking this lag can make us think we have further to go when, in reality, we just have to wait for earlier actions to work their way through the economy. There is a large literature on the lags in monetary policy. And while there is no clear consensus on exactly how long they are, there is broad agreement that it’s not immediate and likely takes at least several quarters.”
“The Fed started tightening policy close to a year ago. Interest-sensitive sectors like housing started to cool very quickly … Labor markets remain solid but are showing early signs of cooling … And although one month of data does not a victory make, the latest inflation report had some encouraging numbers, including a long awaited decline in goods price inflation.”
“Looking ahead, I will be watching for further calming in these areas, as well as signs that pandemic-related imbalances between supply and demand are continuing to subside.”
Post Speech Interview
Fed Funds
“What I’m thinking of is based on history, based on the amount of inflation out there, based on the lags and monetary policy that we understand, how high do I think the rate will need to go to get this job done? And right now my own outlook is around 5.00%.”
“So 5.00% is a modal outlook, but something in between 4.75%, which is a little less than 5.00%, or a little more than 5.00%, 5.25%, also seems like a reasonable range.”